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Tuesday, November 25, 2008

government and "rational" pricing

i mistakenly turned on cnbc the other day to hear the same old clap-trap about housing "asset" prices. the the straight-faced, yet empty-headed charlie gasparino was talking up the need for the government to set "rational" prices for the now infamous "toxic" assets that are tearing down the government/banking industry. he contends that the market is acting irrationally and so the government needs to step in to fix what he sees as a problem. it's this type of economic ignorance that makes it hard to know where to start in the debunking process.

let's get one thing straight first - the government is not a magic solution machine or a money tree. it's nothing more than a bunch of ethically challenged lawyers sitting in a room together interfering with people's lives on a massive scale, in fields they have little or no understanding of. they're not gods, they have no products or viable services they can sell and they have an undeniable record of extreme incompetence.

price, by its very nature, is a function of market transactions. there is no such thing as "irrational pricing". because price reflects the valuations of market participants, it is always rational. like gasparino, most people do not understand the idea that value is subjective. value is determined by each market participant according to his own ideas of the usefulness, necessity and desirability of certain goods or services in the context of each participant's given set of circumstances. there is no price level that can more accurately represent true value than the market price.

when government sets prices, it must assume that there is some objective value and that there is a way to determine what it is. because government has no market participants by which to determine what assets are really worth, they must set arbitrary values based on some method of determination that will not accurately represent true valuation. this being true, rationality can have no place in such practices and the door is left wide open for values to be set politically - guaranteed to benefit the well-connected at the expense of civilized society.

there are real consequences to price-fixing as well. set prices below the market price and a shortage will result as more buyers will appear than will sellers. setting prices too high, on the other hand will result in surpluses, where sellers outnumber buyers. there is one other scenario associated with price-fixing that more accurately represents the situation now in question: fixing values of zero at prices higher than zero. the assets gasparino mentioned effectively have a market value of zero. in his mind, the solution to the problem is simple to, by some governmental fiat, raise the price to something more appealing to those who (by relying on their own subjective valuations, ironically) prefer a higher price. the problem with that is that no market participant will pay more than zero for something they value at zero. so there are only two ways out of this. either the state must force people to buy things they don't want (as we see them do on a regular basis through taxation), or to do the same thing indirectly by buying the assets themselves (using other other people's money, of course). either way, the worthless assets will be foisted upon those who do not value them through political action, distributing losses throughout an economy and weakening all participants in favor of the few asset holders who, by their own poor investing, got stuck with something worthless.

this distribution of loss is a main idea of socialism and is the reason why it has failed so many times and will continue to wreak havoc among populations unlucky enough to be subjected to it. so why do they continue to do the same things that have failed to produce prosperity among subject societies, or have even led to massive declines in quality of life? because these things, while destroying civilized society, greatly empower the state and transfer wealth to the politically connected. this is the very reason for the existence of the state - to parasitize society for the benefit of the few.